Bill Ackman of Pershing Square Capital added 3% to his stake in Fortune Brands Inc. (FO, Financial), according to GuruFocus Real Time Picks. Ackman has already owned 11% of the $9 billion company since the latter half of 2010. As an activist shareholder, Ackman has shaken things up at the company over the last year and gotten his way – the conglomerate has agreed to spin off two of its disparate units in an effort to unlock shareholder value.
Fortune owns well-known brands in three sectors that have virtually nothing in common: spirits including Jim Beam and Maker’s Mark, home products including the Moen brand, and golf equipment including Titleist. The company was cooperative when Ackman and his associates met with senior management to “share [their] thinking on the company,” in November, 2010.
Fortune Brands has had steady free cash flow ranging from $439 million to $801 million over the last ten years, indicating little growth. Its shares were traded at around $63 with a P/E ratio of 21.6 and P/S ratio of 1.4. The dividend yield of Fortune Brands Inc. stocks is 1.2%.
The spirits business is Fortune’s most profitable, followed by home and security, with the golf unit being the least profitable. Under the plan, the liquor business would continue on as the primary business, and the company would look for buyers for the other two or spin one off.
Ackman described the appeal of the liquor business in his third quarter 2010 letter: “We believe that Spirits is one of the great consumer categories given its strong and sustainable profit margins, high barriers to entry, economic resiliency, and limited exposure to mass merchants.”
He added, “Despite the 40% increase in stock price since we first established our position, we believe there is substantially greater value that can be realized. “
Mario Gabelli also owns 2 million shares of Fortune Brands, and praised Ackman’s strategy on Bloomberg, noting another benefit of the spin off. “They have $3.6 billion of debt,” he said. “They can sell off the golf business, very tax efficiently, reduce the debt, allocate it to its various components, and so you have a very interesting split. Two businesses that I like, not only one.”
In May of this year, Fortune Brands announced that it had already found a buyer for its golf business. It agreed to sell to Fila Korea Ltd. and Mirae Asset Private Equity, the largest private equity firm in Korea, for $1.225 billion, of which it would realize net proceeds of approximately $1.1 billion after taxes and expenses.
Now selling at $62 per share, GuruFocus writer Geoff Gannon believes that the stock was undervalued as a large conglomerate when Ackman bought it, but not anymore. “Whatever additional profits Fortune shareholders get from this point on are going to have to come from better run spin offs,” he said. “Or – more likely – from premiums paid by strategic buyers for each of the three pieces. The profits from buying a cheap stock are gone. There’s no more valuation adjustment needed. If Fortune was broken up into 3 separate public companies – it could easily sell for the same price it does today.”
Ackman made an estimated $302 million profit so far on Fortune Brands.
In the first quarter 2011, three gurus sold out of the company and one reduced his stake 99%. George Soros, however, added to the stake he initiated in the fourth quarter of 2010.
In March, Ackman filed an activist 13D revealing an 8.6% ownership stake in a similar firm, Alexander & Baldwin. The Honolulu-based company parallels Fortune Brands in that it also operates three unrelated segments – transportation, real estate and agribusiness. Ackman has not made public his plan for the company, but said in the filing that he will “expect to engage in discussions with management, the board and other stockholders.”
Fortune owns well-known brands in three sectors that have virtually nothing in common: spirits including Jim Beam and Maker’s Mark, home products including the Moen brand, and golf equipment including Titleist. The company was cooperative when Ackman and his associates met with senior management to “share [their] thinking on the company,” in November, 2010.
Fortune Brands has had steady free cash flow ranging from $439 million to $801 million over the last ten years, indicating little growth. Its shares were traded at around $63 with a P/E ratio of 21.6 and P/S ratio of 1.4. The dividend yield of Fortune Brands Inc. stocks is 1.2%.
The spirits business is Fortune’s most profitable, followed by home and security, with the golf unit being the least profitable. Under the plan, the liquor business would continue on as the primary business, and the company would look for buyers for the other two or spin one off.
Ackman described the appeal of the liquor business in his third quarter 2010 letter: “We believe that Spirits is one of the great consumer categories given its strong and sustainable profit margins, high barriers to entry, economic resiliency, and limited exposure to mass merchants.”
He added, “Despite the 40% increase in stock price since we first established our position, we believe there is substantially greater value that can be realized. “
Mario Gabelli also owns 2 million shares of Fortune Brands, and praised Ackman’s strategy on Bloomberg, noting another benefit of the spin off. “They have $3.6 billion of debt,” he said. “They can sell off the golf business, very tax efficiently, reduce the debt, allocate it to its various components, and so you have a very interesting split. Two businesses that I like, not only one.”
In May of this year, Fortune Brands announced that it had already found a buyer for its golf business. It agreed to sell to Fila Korea Ltd. and Mirae Asset Private Equity, the largest private equity firm in Korea, for $1.225 billion, of which it would realize net proceeds of approximately $1.1 billion after taxes and expenses.
Now selling at $62 per share, GuruFocus writer Geoff Gannon believes that the stock was undervalued as a large conglomerate when Ackman bought it, but not anymore. “Whatever additional profits Fortune shareholders get from this point on are going to have to come from better run spin offs,” he said. “Or – more likely – from premiums paid by strategic buyers for each of the three pieces. The profits from buying a cheap stock are gone. There’s no more valuation adjustment needed. If Fortune was broken up into 3 separate public companies – it could easily sell for the same price it does today.”
Ackman made an estimated $302 million profit so far on Fortune Brands.
In the first quarter 2011, three gurus sold out of the company and one reduced his stake 99%. George Soros, however, added to the stake he initiated in the fourth quarter of 2010.
In March, Ackman filed an activist 13D revealing an 8.6% ownership stake in a similar firm, Alexander & Baldwin. The Honolulu-based company parallels Fortune Brands in that it also operates three unrelated segments – transportation, real estate and agribusiness. Ackman has not made public his plan for the company, but said in the filing that he will “expect to engage in discussions with management, the board and other stockholders.”
